Technical indicators are a crucial element in any trader’s toolkit. Developing the indicators already in your strategy and exploring those that you aren’t currently using, can help to push your trading technique to a more advanced level. Integrating multiple indicators into your strategy optimises chart analysis, aids trend prediction and works to maintain accurate trading decisions in a variety of market conditions.
Review key trading techniques with our Advance Technical Indicators Course Summary. Consolidate your knowledge of the benefits of indicators and how they can be applied in real-world scenarios.
Using indicators to determine trends
A crucial way to improve any trading strategy is to use indicators to determine price trends, including movement, speed or future price fluctuations. The three main types of technical indicators are:
- Momentum indicator
- Lagging indicator
- Static indicator
Momentum-based indicators, such as the moving average convergence/divergence (MACD) and the Relative Strength Index (RSI) help investors to spot when prices may hold against, break above or revert away from their chosen support level. Indicators such as these work with current price data to predict future price trends.
Integrating moving average (MA) indicators into a trading strategy works by using historical price data to generate future price trends. A rising MA indicates a rising trend. However, traders should consider the nuances of using historical data to predict future data because there are no guarantees of recurrence. Combining the MA with the MACD, for example, is a great way to optimise both historical and current data to better predict a future trend.
Pivot points are a popular static indicator that uses key price levels from a previous day’s trading session to determine the potential price movement of the following day. Like the MA, pivot points show a change in price movement, rather than the direction of that change. These are best used in combination with momentum indicators.
Integrating several different types of indicators into your trading strategy can help to balance out your strategy and prepare you for more accurate trend prediction.
Leveraging support and resistance
Support and resistance levels are the cornerstone of technical analysis and offer essential clues to individual traders of the wider market’s sentiment. When enough traders consider a particular support level to be significant, the wider market can sometimes trade in a certain direction if price reaches a psychologically important level.
Tip: Support/resistance levels are less effective when there is a fundamental shift in market sentiment e.g., breaking news.
Traders can use market-specific support and resistance levels when implementing stop-loss instructions into their trading strategy. For example, setting slightly higher support levels during a period of short-term market instability can prevent a trade from closing before price movements inevitably stabilise.
Understanding how to customise your support levels to work alongside the indicators covered in this course can advance your trading strategy to make sure it works in a variety of market conditions.
Adapting to changing market conditions
Learning how to adapt your trading strategy is essential when trading in a volatile market. Stochastic indicators, such as the MACD and RSI, provide readings on whether the momentum of price change is increasing or decreasing. Consider building additional oscillating indicators into your chart analysis strategy to determine the volatility of price movement in the market.
If, perhaps, a market becomes too volatile to trade with your chosen strategy, you can apply your strategy to a different asset class in a different, more stable market. Each indicator is adaptable, but their effectiveness will differ. For instance, a 90-day moving average (MA) may be more suitable for longer-term strategies in less volatile markets, focusing on identifying trends. Conversely, a 1-day MA could be more effective for day trading, where capturing short-term price movements is crucial. In addition, indicators can also help to identify overbuying or overselling, offering valuable insights into market sentiment.
Tip: Always consider the nuances of time frames and historical data when reading indicator signals.
Final thoughts
Building a potentially successful trading strategy is possible when reading and deciphering indicator signals to a highly accurate level. The Advanced Trading Indicators Course focuses on practical technical analysis of indicators so that you can create a balanced, robust and effective trading strategy that can be adapted to a variety of market conditions.
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This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.